Press Release

TowneBank Reports Third Quarter 2018 Earnings

Company Release - 10/25/2018 8:30 AM ET

SUFFOLK, Va., Oct. 25, 2018 (GLOBE NEWSWIRE) -- TowneBank (the “Company”) (NASDAQ: TOWN) today reported record earnings for the quarter ended September 30, 2018, of $38.29 million, or $0.53 per diluted share, compared to the $27.15 million or $0.44 per diluted share for the quarter ended September 30, 2017. Excluding acquisition-related expenses, earnings for the quarter ended September 30, 2018 were $38.67 million (non-GAAP), or $0.54 (non-GAAP) per diluted share, compared to $27.50 million (non-GAAP), or $0.44 (non-GAAP) per diluted share for the quarter ended September 30, 2017.

“As the continued leaders in deposit market share in Hampton Roads, we are pleased to report another record quarter and strong operating performance.  Net income increased 41.05% over 2017, credit quality remained strong and our return on average assets was 1.40%,” said G. Robert Aston, Jr., Executive Chairman.

Highlights for the Third Quarter of 2018 Compared to the Third Quarter of 2017:

  • Total revenues were $137.91 million, an increase of $22.58 million, or 19.57%.
  • Loans held for investment increased $1.97 billion, or 33.35%, from September 30, 2017, and $0.11 billion, or 1.37%, from June 30, 2018, or 5.45% on an annualized basis.  Excluding loans acquired in the Paragon merger of $1.43 billion, loans increased $538.72 million, or 9.11% from September 30, 2017.
  • Total deposits were $8.30 billion, an increase of $1.75 billion, or 26.74%.
  • Noninterest bearing deposits increased by 20.77%, to $2.67 billion, representing 32.19% of total deposits.
  • Annualized return on common shareholders' equity of 10.30% and annualized return of average tangible common shareholders' equity of 16.30% (non-GAAP).
  • Net interest margin of 3.62% and taxable equivalent net interest margin of 3.64% (non-GAAP).
  • Maintained number one market share in Hampton Roads per the 2018 Federal Deposit Insurance Corporation ("FDIC") Deposit Market Share Report. 
  • Effective tax rate of 19.30% benefiting from the Tax Cuts and Jobs Act of 2017.

“During the third quarter, Towne continued to cultivate the benefits achieved through prior quarter organic growth and our successful Paragon merger. We continue to identify market opportunities to expand our reach in North Carolina with our unique brand of Hometown Banking,” said J. Morgan Davis, President and Chief Executive Officer.

Quarterly Net Interest Income Compared to the Third Quarter of 2017:

  • Net interest income was $88.70 million compared to $65.92 million at September 30, 2017.
  • Taxable equivalent net interest margin was 3.64%, including accretion of 18 basis points, compared to 3.43%, including accretion of 12 basis points, for 2017.
  • Total cost of deposits increased to 0.72% from 0.47% at September 30, 2017.
  • Average interest-earning assets totaled $9.73 billion at September 30, 2018 compared to $7.71 billion at September 30, 2017, an increase of 26.15%.
  • Average loans held for investment represented 80.45% of average earning assets at September 30, 2018 compared to 76.48% in the third quarter of 2017.
  • Average interest-bearing liabilities totaled $6.57 billion, an increase of $1.45 billion from prior year.

The following table sets forth an estimate of the expected effects of the aggregate acquisition accounting adjustments on pre-tax net interest income for the periods shown (in thousands):

  Discount Accretion (Premium Amortization)
  For the three months ended
  December 31,
2018
 March 31,
2019
 June 30,
2019
 September 30,
2019
Assets:                
Investment Securities $(70) $(71) $(70) $(70)
Loans 1,684  1,599  1,554  1,540 
         
Liabilities:        
Deposits 60  54  51  47 
         
Total estimated effect on net interest income $1,554  $1,474  $1,433  $1,423 
_______________________________________        
Note:  This information is intended for informational purposes only and is not necessarily indicative of future results.
           Actual results may differ due to factors such as changes in estimated prepayment speeds or projected credit loss rates.
 

Quarterly Provision for Loan Losses:

  • Recorded a provision for loan losses of $1.24 million compared to $0.70 million one year ago and $3.06 million in the prior quarter.
  • Net charge-offs were $0.54 million compared to $0.43 million one year prior.  The ratio of net charge-offs to average loans on an annualized basis was 0.03% compared to 0.01% in the prior quarter and 0.03% for the third quarter of 2017.
  • The allowance for loan losses represented 0.64% of total loans compared to 0.64% at June 30, 2018 and 0.75% at September 30, 2017.  Loan loss reserve as a percentage of total loans, excluding purchased loans, decreased to 0.82%, from 0.84% at June 30, 2018 and 0.86% at September 30, 2017.  The allowance for loan losses was 7.25 times nonperforming loans compared to 12.64 times at June 30, 2018 and 5.06 times at September 30, 2017.

Quarterly Noninterest Income Compared to the Third Quarter of 2017:

  • Total noninterest income was $49.22 million compared to $49.42 million in 2017.  An increase of $2.38 million in insurance commissions and other title fees and an increase of $0.36 million in service charges on deposit accounts were offset by a decrease of $3.28 million in residential mortgage banking income.
  • Residential mortgage banking income was $15.80 million compared to $19.09 million in third quarter 2017.  Loan volume in the current quarter was $811.50 million, with purchases comprising $728.11 million and refinancing activity accounting for $83.39 million.  Loan volume in third quarter 2017 was $891.35 million, with purchase activity of $749.56 million and refinancing activity of $141.79 million.  Lower volumes and continued pressure on gain on sale margin led to the decline in revenue.
  • Insurance segment total revenue increased 17.80% to $16.82 million in third quarter primarily related to a second quarter 2018 insurance agency acquisition and increases in commercial line commissions.  Additionally the change in the timing of revenue recognition related to the adoption of new accounting guidance resulted in an increase of insurance commission revenue for the third quarter of approximately $0.94 million.
  • Property management fee revenue decreased 27.15%, or $2.16 million, primarily related to a change in the timing of revenue recognition due to the adoption of new accounting guidance on revenue recognition.  The change in accounting guidance resulted in a decrease of property management fee income for the third quarter of approximately $2.95 million.

Quarterly Noninterest Expense Compared to the Third Quarter of 2017:

  • Total noninterest expense was $88.26 million compared to $74.19 million, an increase of $14.08 million, or 18.97%.  This reflects increases of $7.40 million in salary and benefits expense, $0.97 million in outside processing expenses, $1.04 million in intangible amortization expense, $0.86 million in marketing expense,  $0.63 million in professional fees, and $0.96 million in software expense.
  • Noninterest expense included operational expenses of entities acquired subsequent to third quarter 2017 of $8.25 million, primarily in our Banking and Insurance segments.  Excluding acquired entity expenses, noninterest expense was $80.01 million for the quarter ended September 30, 2018, or an increase of 7.84% compared to 2017.

Quarterly Income Taxes Compared to the Third Quarter of 2017:

  • Income tax expense was $9.16 million compared to $11.86 million, one year prior.  This represents an effective tax rate of 19.30% compared to 30.41% in the third quarter of 2017.
  • The decrease in the effective tax rate from the prior year is due to the Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017.  The reduction from 35% to 21% of the U.S. federal corporate tax rate was among the key changes to U.S. tax law, effective January 1, 2018.

Investment Securities:

  • Total investment securities were $1.16 billion compared to $1.16 billion at June 30, 2018 and $0.92 billion at September 30, 2017.  The weighted average duration of the portfolio at September 30, 2018 was 3.32 years.  The carrying value of the available-for-sale portfolio included $26.22 million of net unrealized losses compared to $20.60 million at June 30, 2018 and $2.36 million in net unrealized losses at September 30, 2017.  The increase in net unrealized losses was primarily due to interest rate fluctuations.  The carrying value of the held-to-maturity portfolio does not reflect $0.17 million in net unrealized gains compared to $0.64 million in net unrealized gains at June 30, 2018 and $2.21 million in net unrealized gains at September 30, 2017.

Loans:

  • Total loans held for investment were $7.88 billion at September 30, 2018 compared to $7.77 billion at June 30, 2018 and $5.91 billion at September 30, 2017.
       % Change
 Q3 Q3 Q2 Q3 18 vs. Q3 18 vs.
(dollars in thousands)2018 2017 2018 Q3 17 Q2 18
Real estate-construction and development$1,016,120  $880,655  $989,910  15.38% 2.65%
Commercial real estate - investment related properties1,957,297  1,336,277  1,935,013  46.47% 1.15%
Commercial real estate - owner occupied1,259,368  966,986  1,227,072  30.24% 2.63%
Real estate-multifamily284,423  185,323  288,043  53.47% (1.26)%
Real estate-residential 1-4 family1,608,517  1,239,886  1,596,264  29.73% 0.77%
Commercial and industrial business1,447,794  1,084,555  1,440,625  33.49% 0.50%
Consumer and other loans308,173  216,797  298,029  42.15% 3.40%
Total$7,881,692  $5,910,479  $7,774,956  33.35% 1.37%
                  

Asset Quality:

  • Nonperforming assets declined to $27.33 million, or 0.25% of total assets, compared to $33.89 million, or 0.39%, at September 30, 2017.
  • Nonperforming loans were 0.09% of period end loans.
  • Foreclosed property decreased to $18.15 million from $21.50 million at September 30, 2017.

Deposits and Borrowings:

  • Total deposits were $8.30 billion compared to $7.99 billion at June 30, 2018, and $6.55 billion at September 30, 2017.  The increase in deposits includes $1.25 billion acquired in the Paragon merger.  Loans to deposits were 94.97% compared to 97.29% at June 30, 2018 and 90.26% at September 30, 2017.
  • Non-interest bearing deposits were 32.19% of total deposits at September 30, 2018 compared to 32.50% at June 30, 2018 and 33.78% at September 30, 2017.
  • Total borrowings were $1.17 billion compared to $1.17 billion and $0.80 billion at June 30, 2018 and September 30, 2017, respectively.
       % Change
 Q3 Q3 Q2 Q3 18 vs. Q3 18 vs.
(dollars in thousands)2018 2017 2018 Q3 17 Q2 18
Noninterest-bearing demand$2,671,558  $2,212,047  $2,597,320  20.77% 2.86%
Interest-bearing:         
Demand and money market accounts3,096,317  2,253,746  3,017,767  37.39% 2.60%
Savings298,368  320,028  305,334  (6.77)% (2.28)%
Certificates of deposits2,233,188  1,762,641  2,070,790  26.70% 7.84%
Total$8,299,431  $6,548,462  $7,991,211  26.74% 3.86%
                  

Capital:

  • Common equity tier 1 capital ratio of 11.53%.
  • Tier 1 leverage capital ratio of 9.98%.
  • Tier 1 risk-based capital ratio of 11.57%.
  • Total risk-based capital ratio of 14.90%.
  • Book value was $20.54 compared to $20.22 at June 30, 2018 and $18.04 at September 30, 2017.
  • Tangible book value was $13.83 compared to $13.50 at June 30, 2018 and $13.08 at September 30, 2017.

About TowneBank:
As one of the top community banks in Virginia and North Carolina, TowneBank operates 40 banking offices serving Chesapeake, Chesterfield County, Glen Allen, Hampton, James City County, Mechanicsville, Newport News, Norfolk, Portsmouth, Richmond, Suffolk, Virginia Beach, Williamsburg, and York County in Virginia, along with Raleigh, Cary, Charlotte, Moyock, Grandy, Camden County, Southern Shores, Corolla and Nags Head in North Carolina.  TowneBank also offers a full range of financial services through its controlled divisions and subsidiaries that include Towne Investment Group, Towne Wealth Management, Towne Insurance Agency, Towne Benefits, TowneBank Mortgage, TowneBank Commercial Mortgage, Berkshire Hathaway HomeServices Towne Realty, Towne 1031 Exchange, LLC, and Towne Vacations.  Local decision-making is a hallmark of its hometown banking strategy that is delivered through the leadership of each group’s President and Board of Directors.  With total assets of $11.12 billion as of September 30, 2018, TowneBank is one of the largest banks headquartered in Virginia.

Non-GAAP Financial Measures:
This press release contains financial information determined by methods other than in accordance with GAAP.  The Company's management uses these non-GAAP financial measures in its analysis of the Company's performance.  These measures typically adjust GAAP performance measures to exclude the effects of the amortization of intangibles and include the tax benefit associated with revenue items that are tax-exempt, as well as adjust income available to common shareholders for certain significant activities or transactions that are infrequent in nature.  Management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company’s core businesses.  These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of GAAP to non-GAAP disclosures are included as tables at the end of this release.

Forward-Looking Statements:
Certain statements contained in this release constitute forward-looking statements within the meaning of U.S. federal securities laws.  These forward-looking statements speak only as of the date of this release, are based on current expectations, and involve a number of assumptions. These include statements regarding TowneBank’s future economic performance, financial condition, prospects, growth, strategies and expectations, and objectives of management, and are generally identified by the use of words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” or “project” or similar expressions.  TowneBank intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. You should not place undue reliance on forward-looking statements, which are subject to assumptions that are subject to change. TowneBank’s ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. These forward-looking statements are subject to a number of factors and uncertainties that could cause actual results to differ from those indicated or implied in the forward-looking statements and such differences may be material.  Factors which could have a material effect on the operations and future prospects of TowneBank include but are not limited to: changes in interest rates, general economic and business conditions; legislative/regulatory changes; the monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; the quality and composition of TowneBank’s loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in TowneBank’s market area; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; changes in the securities markets; changes in accounting principles, policies and guidelines; and other risk factors detailed from time to time in filings made by TowneBank with the Federal Deposit Insurance Corporation.  TowneBank undertakes no obligation to update or clarify these forward-looking statements, whether as a result of new information, future events or otherwise.

Media contact:
G. Robert Aston, Jr., Executive Chairman, 757-638-6780
J. Morgan Davis, President and Chief Executive Officer, 757-673-1673

Investor contact:
William B. Littreal, Chief Financial Officer, 757-638-6813

TOWNEBANK
Selected Financial Highlights (unaudited)
(dollars in thousands, except per share data)
 
 
 Three Months Ended
 September 30, June 30, March 31, December 31, September 30,
 2018 2018 2018 2017 2017
Income and Performance Ratios:         
Total Revenue$137,915  $137,058  $126,276  $109,141  $115,339 
Net income39,252  36,138  25,943  13,287  28,595 
Net income attributable to TowneBank38,293  34,804  24,705  12,333  27,150 
Net income per common share - diluted0.53  0.48  0.36  0.20  0.44 
Return on average assets1.40% 1.32% 1.02% 0.57% 1.26%
Return on average assets - tangible (non-GAAP)1.56% 1.48% 1.15% 0.65% 1.37%
Return on average equity10.21% 9.55% 7.39% 4.26% 9.49%
Return on average equity - tangible (non-GAAP)16.08% 15.19% 11.64% 6.39% 13.67%
Return on average common equity10.30% 9.62% 7.45% 4.30% 9.58%
Return on average common equity - tangible (non-GAAP)16.30% 15.36%